The SEC charged a brokerage firm, Macquarie Capital Inc., for underwriting a public offering after receiving a due diligence report signifying that a China-based company’s offering materials contained misrepresentations.

Macquarie Capital was the principal underwriter on a public stock offering in 2010 by Puda Coal, which allegedly owned a coal company in China that was traded on the NYSE.  In the offering documents as well as in marketing materials, Puda Coal claimed to own a 90 percent ownership in the Chinese coal company.  However, Puda Coal did not own any stake of the coal company.  Corporate registry filings in the PRC proved that Puda Coal’s chairman had previously transferred all of the ownership Puta Coal had to himself, then sold almost half of his interest.  After the transfers, Puta Coal no longer owned any part of the coal company.

During the due diligence review, former investment banker William Fang was provided with the report showing Puda Coal’s discrepancies.  Fang read the report but failed to act when learning the information.  Further, Fang distributed the report to other executives in an email, adding the commentary, “no red flags were identified.”  Aaron Black, the former managing director of Macquarie Capital, received the email from Fang, read the misstatements, and failed to act on the information as well.

Macquarie Capital enjoyed a net profit of $4,170,000 from its efforts as lead underwriter on the Puda Coal offering.  Stocks rose up to $12 per share.  However, information from the report that Fang, Black, and others had read but ignored was made public on the Internet.  Puda Coal’s fraudulent misstatement led the stock prices to dive down to mere pennies per share.

Macquarie Capital, Black, and Fang were charged with violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.  Macquarie Capital settled for $15 million plus costs to organize a Fair Fund to reimburse investors who suffered losses.  For failure to exercise care in their due diligence review, Black settled for around $213,000 and Fang settled for $35,000.  For at least five years, Black is barred from any supervisory position in the securities industry and Fang is barred from the securities industry.

Firms like Macquarie Capital are the “critical gatekeepers who are relied upon by the investing public to ferret out the essential facts and address potential inaccuracies before marketing a public stock offering,” said Andrew M. Calamari, SEC Regional Director.  “Macquarie Capital proceeded with this offering despite a due diligence process that exposed a false claim by Puda Coal, and investors suffered massive losses when the truth publicly came to light.”

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